Economists tell us the U.S. must face one of two scenarios: Either the next President will face a recession in office, or the U.S. will have the longest economic expansion in its history. Two widely divergent paths. Odds are that the recession is more likely.
Economists in The Wall Street Journal’s latest monthly survey of economists put the odds of the next downturn happening within the next four years at nearly 60%. Word of the next economic slowdown has been growing louder for the past few months. Our analysts have done the research to understand the environment. Here are five reasons it’s unlikely in ’17.
1). Fed is neutralizing policy not trying to slow down economic growth. In other words their monetary policy is still accommodative, keeping the U.S. yield curve positively sloped. Even if (when) rates rise, capital will still be available and at reasonable rates, fueling everything. Available capital means restaurant brands, suppliers can continue to invest.
2). Employment trends continue to be robust. We continue to see demand for labor, indicating growth. Wage growth was at a cyclical high at this most recent jobs report from November 4th, growing at 2.8%. Unemployment trending down below 5.0% headed toward mid 4% area. While this may make recruiting talent a challenge, low unemployment is great for business.
3). The new administration’s stated policy is to increase economic growth through Fiscal Policy. There are fiscal initiatives that should be simulative to growth. Income tax rate reductions, Corporate tax rate reductions, Repatriation incentives through the Homeland Investment Act will likely bring significant capital flows back into the United States for reinvestment domestically.
4). Commodity markets are rebalancing. In other words, the disinflationary forces that transpired from last year’s commodity markets decline created excessively tight financial conditions. Credit spreads widened, the dollar strengthened, asset prices declined, etc. The conditions we are heading into now are the opposite from those (with the exception of recent dollar strength) we faced in the back half of 2015 and first quarter of 2016. Currently, we are seeing Dollar strength for positive reasons such as higher expected U.S. economic growth assumptions.
5). GDP is currently accelerating. Most recent drivers coming from consumer spending as evidenced by improving retail sales trends which are highly correlated to wage growth and the level of savings. S&P 500 earnings are highly correlated to GDP trends. We are about to see the first quarterly EPS growth from S&P 500 earnings in the fourth quarter of this year. The third quarter was trending better as well.
For these reasons, we’re bullish on 2017. Our recent podcast on the coming recession is still relevant, as we believe the downturn will come, eventually. Like most in the restaurant business, we don’t mind if that time takes longer to get here.